It's my understanding that since there are two owners to the property, the most correct way to report the income and expenses is to file a Partnership Tax Return, Form 1065. Plus, if your goal is to give yourself maximum asset protection, you would want to file a separate tax return, and not just file a Schedule E, Rental Income and Loss, as part of your federal tax return. By doing so, you separate the rental property off of your federal tax return.

Check out the IRS' article on LLCs Filing as a Partnership at: http://www.irs.gov/businesses/small/selfemployed/article/0,,id=205014,00.html.

To take this a little further, I took a look at the instructions to IRS Schedule E. Here is what I read:

Husband-wife qualified joint venture. Do not use Schedule E to report income and expenses from a rental real estate business that is a qualified joint venture conducted by you and your spouse, if you file a joint return for the tax year.

Generally, if you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are taxed as a partnership. However, if you and your spouse each materially participate as the only members of a jointly owned and operated business, and you file a joint return for the tax year, you can make an election to be treated as a qualified joint venture instead of a partnership. For an explanation of “material participation,” see the instructions for Schedule C, line G, on page C-3.

Zip Code: 01801